Public Bill Committee

(Morning)

[David Taylor in the Chair]

Further written evidence to be reported to the House for publication

PEN 2 Association of British Insurers

New Clause 8

Retirement Income Funds
‘(1) The Finance Act 2004 (c. 12) is amended as follows.
(2) After section 152 (meaning of “arrangement”), insert—
“152A Meaning of ‘Retirement Income Fund’
(1) In this Part, a Retirement Income Fund means a scheme for the reinvestment of savings in retirement which—
(a) is operated by or on behalf of a person authorised to operate a registered pension scheme,
(b) is a scheme in which investments are approved by the Inland Revenue, and
(c) meets the conditions set out in subsections (2) to (9).
(2) The first condition is that, subject to the other conditions in this section, funds held in the Retirement Income Fund may be invested and withdrawn by the member as and when he elects.
(3) The second condition is that an authorised Retirement Income Fund provider must set an annual maximum withdrawal allowance for each member, based on an assessment of each member’s life expectancy, and a member’s withdrawals from the fund in any one year must not exceed that allowance.
(4) The third condition is that, in setting annual maximum withdrawal allowances, an authorised provider must ensure that no member’s total future annual income falls below the Minimum Retirement Income level (as set under section [Minimum Retirement Income] of the Pensions Act 2007) except in the circumstances provided for in the sixth condition.
(5) The fourth condition is that an authorised provider must set an annual minimum withdrawal allowance so that each member’s total income is at least equivalent to the Minimum Retirement Income level, except in the circumstances provided for in the sixth condition.
(6) The fifth condition is that if a member chooses not to declare his total annual income to the authorised provider he must withdraw funds equivalent to the level of the Minimum Retirement Income level or his annual maximum withdrawal allowance, whichever is the lower.
(7) The sixth condition is that, where there are insufficient funds to enable the annual minimum withdrawal allowance to be set so that a member’s total income is at least equivalent to the Minimum Retirement Income level, the allowance should be set at the highest level consistent with the assessment of the member’s life expectancy.
(8) The seventh condition is that the maximum and minimum withdrawal allowances must be set at the same level if a member’s total annual income, including his maximum withdrawal allowance, is lower than the Minimum Retirement Income level.
(9) The eighth condition is that a Retirement Income Fund, and any income derived from it, must not be capable of assignment or surrender by the member.”.’.—[Mr. Waterson.]

Brought up, and read the First time.

Nigel Waterson: I beg to move, That the clause be read a Second time.

David Taylor: With this it will be convenient to discuss the following:
New clause 9—Amendment of the pension rules—
‘(1) Section 165 of the Finance Act 2004 (c. 12) (pension rules) is amended as follows.
(2) In subsection (1) (which sets out the pension rules)—
(a) in Pension Rule 4, after paragraph (a), insert—
“(aa) a withdrawal from a Retirement Income Fund,”;
(b) in Pension Rule 4, after the second appearance of the words “scheme pension”, insert the words “a withdrawal from a Retirement Income Fund”;
(c) in Pension Rule 6, after paragraph (a), insert—
“(aa) a withdrawal from a Retirement Income Fund,”;
(d) in Pension Rule 6, after the second appearance of the words “scheme pension”, insert the words “a withdrawal from a Retirement Income Fund”.’.
New clause 10—Minimum Retirement Income—
‘(1) The amount of the Minimum Retirement Income in respect of each tax year shall be set by the Chancellor of the Exchequer by order at the level of the standard minimum guarantee prescribed under section 2 of the State Pension Credit Act 2002 (c. 16).
(2) Before making an order under subsection (1), the Chancellor of the Exchequer shall consult such persons as he considers appropriate.
(3) An order under this section (other than the order that applies to the first tax year during which this section is in force) must be made on or before 31st January of the tax year before the tax year to which the order applies.’.
New clause 11—Removal of age limit for annuity protection lump sum death benefit—
‘(1) Schedule 29 to the Finance Act 2004 (c. 12) is amended as follows.
(2) In paragraph 16(1) (definition of annuity protection lump sum death benefit), paragraph (a) shall cease to have effect.’.

Nigel Waterson: Good morning, Mr. Taylor. I am delighted that you and other members of the Committee have been able to make it here through the snow. This is the last day of this Committee, so I wonder what we are going to do with ourselves on Tuesdays and Thursdays from now on.
The argument on annuities is familiar. It is familiar in part because no fewer than four of my Conservative colleagues have used the opportunity of the private Member’s Bill ballot to put forward the proposition. It is an important issue that affects a number of people—including many who are not affected at the moment, because it touches on their future behaviour. I have been toying with the idea of declaring an interest, as I have some private pension provision and I am not yet 75—although, listening to the hon. Member for Yeovil, one does see one’s life flashing before one’s eyes. 
I mentioned previous private Members’ Bills. I should particularly like to pay tribute to the Rights of Savers Bill, which was introduced by my right hon. and learned Friend the Member for Kensington and Chelsea (Sir Malcolm Rifkind). It build elegantly on earlier attempts at dealing with the problem, it was extremely well drafted, and it widened out the debate to cover how we encourage saving for the future, so it dovetails well with the argument about the shape of personal accounts. I have drawn heavily on that excellent Bill for the new clauses.
No other country, as far as I have been able to discover, has a compulsory annuitisation rule. I shall be happy to give way to the Minister now if he can tell me of one that does.

Andrew Selous: Bosnia-Herzegovina.

Nigel Waterson: I am not going to pursue that. I assume from the fact that the Minister is still sitting that he does not have an answer. Certainly, no country in the western world has such a rule—the United States does not, Canada does not, and nor do many other countries.
It is clear from the difficulties that the Chancellor has got himself into over alternative secured pensions that there is an appetite for change on annuities. That, too, feeds into the debate about saving for retirement. There is a particular issue about what we call the target group for personal accounts, many of them younger workers who are not saving at the moment and are turned off by the idea of pension saving. We have to inspire them with confidence in the pensions system, which we touched on earlier this week, and to make it more attractive. I see that as part of the wider agenda of bringing flexibility and accessibility to pension saving. It is bad enough asking young people to lock up their savings for 40 years; telling them that at some arbitrary date in the future they will have to buy an annuity whether they like it or not adds insult to injury. 
Let me anticipate the Treasury brief that the Minister will no doubt treat us to shortly. The state has a legitimate interest in annuities, but only a narrow one. Of course, those with the potential to buy—people who have built up pension pots—have had tax relief. We will hear more about the Liberal Democrats’ current position on tax relief later but, that apart, the only legitimate concern of the state is whether there is a risk that people will blow their pension pots and then fall back on the public purse.
Looking at new clauses 8, 9, 10 and 11, which have been lifted almost bodily from the Rights of Savers Bill, I make no great defence of, or apology for, the drafting, but I make the point that I have made in previous debates: if there is a technical problem with it, I shall be the first to put my hands up. If the Minister is happy to accept the principle of the new clauses he can have them brushed up and improved by his draftsmen and officials.
New clause 8 returns us to the Finance Act 2004 and is on the meaning of “retirement income fund”, a point on which I shall go into more detail in a moment. Crucially, from the point of view of reassuring the Minister, the new clause mentions schemes
“in which investments are approved by the Inland Revenue”
and sets out various conditions for a retirement income fund. One is that funds
“may be invested and withdrawn by the member as and when he elects.”
It is, after all, the member’s hard-earned money that has prudently been paid into a fund. I shall return in more detail to the other conditions set out in the new clause but the third condition, in proposed new subsection (4), is important. It would set an annual maximum withdrawal allowance to ensure that
“no member’s total future annual income falls below the Minimum Retirement Income level.”
New clause 9 would make consequential amendments to another part of the Finance Act 2004. New clause 10 would give the Chancellor the power to set a figure for minimum retirement income, and new clause 11 would crucially remove the obligation to annuitise at a particular age.
 I shall try as briefly as possible to take the Committee through what the proposals would mean in reality. I have already made the point that we are the only country that does this, so there must be a pretty good reason why the United Kingdom is out of step with the rest of the developed world. Buying annuities has become less and less attractive in recent years. A great philosophical debate rages about whether that is due to greater longevity, which is very nice. When somebody purchases an annuity it means that they will get the money until they die, which is also very nice. Whether because of that or because of interest rates or any other factor, annuities have become a less attractive deal.
We are not proposing any new obligation on people, which seemed to be the concern of the relevant Minister during the passage of the Rights of Savers Bill. The proposals would place no new burdens on the large majority of people who currently choose to purchase an annuity when they retire. I pause to note that there are interesting statistics that were repeated in “The Annuities Market”, the Treasury document of December 2006. They show that the proportion of people who annuitise between the ages of 70 and 74 is small—from memory I believe it is something like 5 per cent. I am trying to anticipate what the Minister will say but we must consider not people’s behaviour now, when they know that there is a rule that they cannot avoid, but their likely behaviour were that rule changed. In particular, to return to my most important point, we must consider how a change would affect the savings behaviour of people starting their careers now rather than those who have already retired or are nearing the end of their careers.
We propose an alternative way of using a pension fund on retirement and a method of controlling the investments and income derived from it. It is not just a matter for the fat cats, although Ministers tend to dismiss it as something only for the better-off—for Tory voters or people with long gravel drives, Volvos and ponies, who vote Lib Dem, whom we mentioned early in our debates. Well-off people have rights too. It is very old Labour to take the line that because people are better off—in other words, they have worked hard and been prudent enough to put money aside—they should somehow be treated badly. That is a very old Labour concept, and I shall be interested to hear how the Minister develops it.
We are proposing something called a retirement income fund—it was called a RIF by my right hon. and learned Friend the Member for Kensington and Chelsea, which seemed a happy coincidence. It is based on the Canadian system, which is an alternative to annuity purchase. [Interruption.] The Minister grunts from a sedentary position, and there is a world of meaning in his grunts. I take that one to be a grunt of disapproval. [Laughter.] As I understand it, the Canadians have had the system for well over 20 years. It works perfectly well and something like half of all pensioners in Canada have these alternative retirement income funds. In fact they are the most widely held retirement income vehicle for pension saving in Canada. In the last tax year for which I have the figures—I am sure the Minister is more up to date as part of his initiating negotiations to sort out the frozen pensions issue in Canada—some 3 million Canadian citizens were above retirement age. Nearly half of them—1.4 million—received income from a retirement fund of the sort we propose.
The idea is a little bit like self-invested personal pensions. The funds will be self-administered. The individual could select, along with the trustees, which investments could be made or managed by the insurance or trust company. It has been hugely successful in Canada, which is not a wholly different economy from our own. We are not suggesting something that has not been road-tested in another country. An important element of this is choice. People should have a right to make these choices about their income in retirement.
Equally there is the principle, which we accept as a responsible Opposition, that individuals should not become a burden on other taxpayers on retirement. Tax relief provided during the process of pension saving shows the benefit of encouraging people to save so they do not fall into that category. Of course in a sense the Government are part-way there already. In fact they are a quarter of the way there because people can already take a tax-free lump sum valued at up to a quarter of their fund. In a sense the principle has already gone. It is just a question of how we calibrate the proportion of the fund to which people can get access rather than annuitise it.
The mechanics are fairly clearly set out in the new clauses. The idea is that those who choose to withdraw from the fund a lump sum or higher income than they would get under the annuity do not then become eligible to receive pension credit. That is why we have something called the minimum retirement credit, and the mechanics of how that is established year to year are set out. An individual can choose to leave assets in the fund and annuitise later on if they want to, and leave in it only what is needed to maintain them at or above the minimum retirement income or draw a lower amount. In any event they would be required to leave within the fund, sufficient funds to meet any shortfall over their lifetime and only withdraw to that limit.
It is important to touch briefly on the whole issue of alternatively secured pensions. Their introduction was hailed at the time as the Government changing their position on compulsory annuitisation. It was spun as a way of getting round that. The Government have obviously taken fright because of the numbers of people wanting to take up the option of alternatively secured pensions. According to the Library brief:
“When Alternatively Secured Pensions were introduced, they were seen by many as an opportunity to preserve capital built up with the help of pension tax relief and pass it on to heirs on death.”
That is hardly a criminal aspiration; it seems a perfectly sensible aspiration for someone who is prudent and wants to pass things on to their family on death.
 The problem with that has been the religious restriction. Strange as it may seem, this policy was designed originally to assist people with a religious objection to pooling mortality risk—to dicing with the Almighty in parlance. That is the risk involved in annuities. It was either the Christian or the Plymouth Brethren who had this concern. It is perfectly legitimate that these concerns should be addressed. According to the last census the total membership of that sect was 781. I suspect that their membership has swelled to a much larger number since then. I am interested to hear the Minister’s up-to-date estimate of how many well-off middle-class people nearing 75 have been queuing up to join. On a serious note, however, there is a hunger for such flexibility.
I have just been handed some briefing which is presumably relevant to my speech; finally the dam has burst on the written evidence. It has been in a large container parked around the corner.
With their amazing blend of cool incompetence and arrogance, the Government did not include in the 2004 Act anything to say that people had to have a religious objection to pooling mortality risk in order to take out an ASP. I love the innocence of some of these Library briefs; I shall quote from this one again:
“It appears that many people who have no religious objection to annuities have been taking out ASPs as an attractive way of avoiding the requirement to buy an annuity at age 75.”
Wow! What a wicked world. That towering figure, the Economic Secretary to the Treasury, has ticked everybody off. On 4 July last year, he said that that was not what was intended at all, but that
“it was always our intention that the rules would apply in the specific and narrow case of individuals with such principled religious objections such as the Christian Brethren.”—[Official Report, 4 July 2006; Vol. 448, c. 728.]
We have had stern warnings from the Economic Secretary, and Treasury Ministers have expressed determination to pass more restrictive secondary legislation if such practices continue. No doubt the Minister will update us on that. If I may say so, the Government are spectacularly missing the point. If people are not harming their fellow taxpayers, why should they not do what they are doing?
There was a good article the other day in Pensions World, which put it rather well:
“Religion should not be a tax avoidance issue. It is staggering that an obscure sect (Census estimate=738 members!) gets special tax treatment. The Bible is the leading Christian authority. Jesus made an important distinction between religion and the state: ‘Render unto Caesar the things which are Caesar's and render unto God that which is God's’.”

Andrew Selous: I declare a slight interest, as I have quite a large number of Plymouth Brethren in my constituency. They are law-abiding, family-minded people and I am not sure that they would like to be described as a sect. They see themselves as being in the mainstream Christian tradition.

Nigel Waterson: I do not want to start a schism. I am a Roman Catholic and we have had enough of that over the centuries. I accept what my hon. Friend says and I am sure that he is absolutely right. I think that, as a matter of principle, the Plymouth Brethren do not vote, so I can continue with impunity to refer to them as a sect. [Interruption.]

David Taylor: Order.

Nigel Waterson: None the less, I withdraw the word “sect”; I will use “denomination” instead, which is a neutral word.
A further Government report said that they would introduce changes from April 2007, from which point individuals will be required to take a minimum annual income from their ASPs. There will be a large tax charge, which I will come on to in a moment, on transfer lump sum death benefits. As Her Majesty’s Revenue and Customs sharply put it:
“These proposals will bring practice and policy intention into line”.
Well, there you go. The problem with that is that we shall end up with essentially confiscatory taxation. The over-75s will be crushed by a series of heavy-handed tax burdens. According to the Government’s new proposals, an inheritance tax charge of 40 per cent. would be charged on any remaining sum. On top of the existing tax, that would amount to a crippling 82 per cent. tax raid, which would wipe out any inheritance benefit. That is grossly unfair and shows that, in his attitude to ASPs, the Chancellor’s mind is as closed as ever on an issue that requires flexibility and openness of mind.
Finally, the Minister’s letter to the Committee of 22 January, which mentioned a seminar and promised us draft regulations—they have not actually materialised—also talked about the Treasury report, “The Annuities Market”. That report raised a couple of interesting points that I shall touch on, partly in order to anticipate his comments. It is an interesting report on a subject about which not a lot is known by many people. On page 15, it quotes the Pensions Commission as saying:
“Since the whole objective of either compelling or encouraging people to save, and of providing tax relief as an incentive is to ensure people make adequate provision, it is reasonable to require that pensions savings is turned into regular pension income at some time.”
Importantly, it also quotes the commission as saying:
“Government should investigate whether there are changes to regulation or tax treatment which can encourage the development of a wider market for drawdown products.”
A great deal of work can and should be done—the Conservative party is certainly doing it—on giving flexibility to savings. I am looking at how personal accounts could mirror some aspects of the 401(k) system in the USA in order to provide flexibility. These are complex issues and we are only just embarking on that process, but it is important, particularly if we are to make personal accounts attractive—especially to younger workers.
Page 17 contains a useful chart on the age at which people currently annuitise. Some 40 per cent. do so between 60 and 64 and 41 per cent. between 65 and 69. As I have said already, only 5 per cent. do so between 70 and 74. I urge the Minister to regard that as current behaviour based on current rules. If the rules change I suspect that behaviour would also change.
The report refers to another recommendation by the Pensions Commission: that the ages of first and last possible annuitisation should rise over time in line with life expectancy. I shall be particularly interested to hear what the Minister can tell us about that. Interestingly, the report states:
“The Government does not believe there is currently a case for increasing age limits.”
In parenthesis, I vaguely recollect that the minimum age is in the process of rising, or indeed has already risen, from 50 to 55. The Minister is nodding so I take that as a yes.
The report goes on to say:
“However, facilitating later retirement is an integral part of pensions reform, and the Government will monitor both limits for consistency with this policy.”
 That raises an interesting issue. We need to ensure that everything that we are doing on the pensions front from annuities to personal accounts and state pension reform dovetails together. There must not be inconsistencies and internal contradictions and it seems sensible to look at those ages while putting up the state pension age.
On page 19 of the report, the Turner commission is quoted as saying:
“Government should consider whether there is a case for a cash limit to the amount which individuals are required to annuitise at any age”.
That seems to suggest that the Turner commission would also like to see the kind of flexibility that we are talking about. The report continues:
“Under this recommendation, individuals would annuitise to a minimum income level and be able to withdraw the rest of their fund as a lump sum — subject to an appropriate tax charge. Although no level was recommended, it has often been suggested it should be a level sufficient to keep an individual off state benefits.”
Well, that is exactly what we are saying. A few paragraphs further down, the door is firmly slammed in the face of that proposal with this bald sentence:
“The Government therefore continues to rule out introducing this option.”
I really do wonder why, when we seem to be out of step not only with the rest of the world but with developments in the pensions world.
There is an interesting chapter starting on page 27 on the issue of ASPs and the concerns expressed about people using a religious loophole to get around the tax system. I will finish on that note; of course, people should not abuse religious objections as a way to get around a tax liability, but that is the Treasury way of looking at it. We should be looking at it entirely the other way around; first, why are people keen to do that—yes, there is an appetite for more flexibility in the system—and secondly, if that is the case why should we not give it to them? So, I commend all the new clauses in the group to the Committee.

David Laws: Good morning, Mr. Taylor, and welcome back to the Chair for this last day in Committee of the Pensions Bill. New clauses 8, 9, 10 and 11 raise some important issues that the hon. Gentleman touched upon and which have been debated in the House many times before. I will therefore just comment briefly on those, given that I shall have plenty of time to speak on some other Liberal Democrat new clauses later today—[Interruption.]—unless, of course, there is a desire for a long speech.
I start by declaring an interest. Like the hon. Member for South-West Bedfordshire, I have a number of Plymouth Brethren in my constituency, including some of the leading lobbyists of the Treasury and of the Department for Work and Pensions; like the hon. Gentleman, I do not regard them as an obscure sect even though they do not vote. In fact, they are becoming a lot less obscure in Yeovil as they are about to build a large church on the edge of the largest town in my constituency, which could therefore become a centre for Plymouth Brethren throughout the country. I congratulate them on the work that they, as a small group, have done in lobbying the Government on this issue.
In fairness, I congratulate the Government—including the Treasury—on taking the time to listen to the concerns of such a small group of non-voters. As we saw yesterday, there are many other examples of rather large groups who do vote that the Government are good at ignoring, so we should not be too ungenerous to Ministers about them taking the time to listen to a particular group.
However, where such potential anomalies and exceptions are created, people exploit them very effectively. The hon. Member for Eastbourne set out what has happened in attempts to use this potential loophole to get around the existing rules on annuities. We have seen that type of experience many times before, particularly in relation to tax policy. We all remember the Chancellor’s film industry tax relief, which was supposed to be targeted at major British films and ended up with programmes like “Coronation Street” relabelling themselves as films to get the benefit of the relief.
The problem here, as highlighted by the comments of the hon. Member for Eastbourne, is that we have a rather antiquated and illiberal system of obliging people to take annuities. That, presumably, is largely built on the fact that we have a low basic state pension and a great deal of means-testing; therefore, the Government have stuck with these rules over time to try and protect the taxpayer interest. We understand the Government’s concerns about compulsory annuitisation, but it is really all a product of Government decisions about the basic state pension, and part of the price that we pay for having a low foundation there.
For those reasons I shall not rehearse all the arguments that we have debated many times before in Committee, but I do want to raise with the Minister a couple of practical issues that spring from the Government’s attempts to give a bit more wiggle room to those people with low pots of money who would normally have to annuitise. The Government have introduced the trivial computation rules to allow people with low amounts of money to get around annuitisation and to take their moneys up front.
I recently met a constituent who had taken that particular route, but who was very concerned about the apparent delays in processing her requirements. Also, although she had a low amount of money and was a low-income earner, she discovered that the Treasury was deducting tax at the 40 per cent. rate, rather than the basic rate, and then requiring people to claim that back. Given that many of the people who are taking their moneys under the rule will be lower-rate or basic-rate taxpayers, I hope that the Minister will look at that issue and respond, if not today, then maybe in a note to the Committee.
The hon. Member for Eastbourne again raised this important issue. I fear that we may be about to hear from the Minister the response that we have heard many times in the past few years. However, we shall wait and see whether the hon. Member for Eastbourne has been successful in persuading the Minister of the strength of his case and of the Canadian model.

James Plaskitt: In introducing the debate on the clauses, the hon. Member for Eastbourne said that the issue was familiar, and it certainly is. He also displayed great perspicacity in anticipating the sort of responses that he would get.
The amendments allow us to discuss the decumulation aspect of pensions, namely turning pension savings into retirement income. I will come to the specifics of the amendments tabled in a moment, but a little bit of background will be helpful. “The Annuities Market”, published with the pre-Budget report of 2006 and already referred to, restated Government policy on turning tax-privileged pension saving into retirement income by purchasing an annuity. It also responded to the views of the Pensions Commission and set out the reasons why we will again be rejecting the clauses today.
Pension saving is about giving individuals an income in retirement, and for no other purpose. The Government provide tax incentives to encourage people to save for their retirement. In the last financial year those totalled £14.3 billion. When individuals come to take their pension benefits, they can take up to 25 per cent. of the pension fund as a tax-free lump sum. In return for such generous incentives, Governments of different persuasions have required, as part of the “deal”, that the remainder of the pension fund is, by age 75, converted into a secure retirement income for life, or used to provide for dependants’ benefits. The most efficient way of doing this is by purchasing an annuity. The arrangements have been in place since 1976 and operated throughout the previous Administrations, as well as this one. Annuities provide the peace of mind of an income for life, regardless of how long that life might be.
Despite some of the criticisms of the scheme that we have heard, annuities provide simplicity, security and a guaranteed income, and at very little risk. Individuals have flexibility on when to annuitise, between the ages of 50—which will become 55 from 2010—and 75, to suit their circumstances. The vast majority in fact annuitise on retirement. Only around 5 per cent. do so after the age of 70. Furthermore, consumers can now choose from an increasing range of annuities, including those that facilitate a flexible retirement or those for people who are prepared to face some investment risk. The hon. Member for Eastbourne called for greater flexibility in the annuities market, but there has been a remarkable growth in what are called mid-market products in recent years. There is a whole variety of ranges of annuities that can be purchased and which introduce a considerable amount of flexibility into the market.

Nigel Waterson: Before the Minister moves off the issue of age limits, what is the current thinking about changing the limits to tie in with the growth in life expectancy and the increase in the state pension age? Perhaps he was going to come on to that.

James Plaskitt: Yes. We took on board what the Pensions Commission said about that. There is no pressure to alter the current age, especially in view of the choices that people make about when to annuitise, as I have just explained. Given life expectancy trends, the upper age will be kept under review.
Individuals have flexibility about when to annuitise, and only a very small proportion do so at anywhere near the present upper age limit. The Government welcome the Pension Commission’s endorsement of the policy; the hon. Member for Eastbourne has already quoted what the commission said and I will not repeat it. Support for the principle is enshrined in the rules of annuitisation.
New clauses 8, 9 and 10 would establish a retirement income fund as an alternative to annuities to deliver an income stream in retirement. The RIF would remain invested and withdrawals between a minimum and maximum would be permitted. An annual maximum withdrawal allowance would be set by the provider for each member, based on an assessment of their life expectancy. A member’s withdrawals from the fund could not in a year exceed that allowance. An annual minimum withdrawal allowance would also be set by the provider, and we presume that a member must withdraw at least that each year. In setting that allowance, the provider would have to ensure that the member’s total income was at least equivalent to a minimum retirement income as defined in new clause 10.
Nothing appears to stop the minimum allowance being set at zero. Provided that the member’s income from other sources for future years is greater than an MRI, there is effectively no maximum withdrawal from the RIF, in which case the member could draw any income.
The RIF has appeared in various guises in the past—the savers Bill has already been referred to in that respect—and it has not improved on its latest outing. Like previous attempts, the new clause is also silent on how RIF withdrawals will be taxed and what will happen on a member’s death. If the member’s other income outside the pension scheme is above the minimum retirement income, they can withdraw large lump sums of tax advantaged pensions savings. In such a situation, an individual might also choose not to draw any pension income from the RIF in order to pass the fund on to heirs. As I said, tax incentives for pension savings are offered to encourage people to secure an income in retirement. The commission endorsed our view that if people take the tax relief on pension saving, it is only fair that it is turned into a retirement income.
Given the apparent ability to extract RIF savings below the annual maximum allowance at will, there is a danger that it would become a vehicle into which other savings were recycled for tax advantage rather than encouraging new retirement savings. There is no mention in the proposal of what happens to the RIF on death.

John Penrose: Is the Minister saying that he would support the principle behind the measures if the technical problems that he describes could be dealt with? I have no doubt that clever people in the Treasury could easily find ways of preventing the sorts of tax avoidance that he mentioned.

James Plaskitt: No; that is certainly not what I am saying. I would not accept what the hon. Member for Eastbourne said either—that it is simply a matter of calibration; the RIF breaches the fundamental point of principle that if tax concessions are given to encourage saving for retirement and that is the purpose for which they are given, that is the purpose to which the fund should be converted. It should not be used for any other purpose. It is not a matter of calibration or tweaking the rules; it is much more fundamental than that.

Nigel Waterson: I referred to calibration in the context of the existing liberty to take up to 25 per cent. as a tax-free lump sum. What is the difference in principle between what is possible now and what we are suggesting here?

James Plaskitt: I am coming to that in a moment, but there remain fundamental differences between what the hon. Gentleman proposes and the current rules on annuitisation. The existence of the 25 per cent. tax-free lump sum drawdown does not breach the principle, because that must be considered alongside all the other rules that apply to the current annuity scheme, many of which are totally breached by the proposed RIF scheme. I shall elaborate on that in a moment.
There is also no mention of what happens to the RIF on death. That suggests that the new clause might be designed to allow individuals to pass on their pension funds to heirs, rather than to secure a retirement income. There is no rationale for taxpayers subsidising bequests.
Another flaw of the RIF, a serious one in my view, is the risk of running out of money during retirement. I note the hon. Gentleman’s faith in insurers’ ability accurately to predict an individual’s life expectancy, which is necessary to make the RIF scheme work. However, nobody can accurately predict an individual’s life expectancy. What insurers can do is to predict average life expectancy of particular cohorts. That enables them to provide a guaranteed income for life, regardless of how long that life is. That is a unique feature of annuities, and another reason why they are an ideal retirement income product.
The hon. Member for Eastbourne noticed that when he referred to the Canadian experience he elicited a bit of a grunt from me. The reason for the grunt was that if we look into the detail of the Canadian experience, we find that the problem of potentially running out of money during retirement is a feature of the Canadian system. That should give us pause for thought before we recommend it. I draw his attention to the view of the Canadian Bankers Association, which is that
“if you take out too much money, you may outlive your RIF and may be short of funds.”
 It is a bit difficult to say to people in their eighties or nineties, “Watch out; you are running out of money.” An implication of the scheme is that it is recommended if one will not live long. What happens under our annuitisation laws is that insurers effectively spread or pool the so-called longevity risk across a range of individuals. Annuities are effectively insurance contracts, insuring individuals against the risk of outliving their pension funds, which makes them fundamentally different from RIFs.
Anyone taking out a RIF would need to simultaneously absorb investment and longevity risk and would be likely to need alternative assets to do so. The ongoing charges of managing a RIF are likely to be significantly more than those for conventional annuities. That is why we think that the RIF would typically be aimed at wealthier individuals.
 So the RIF would be a complex product, probably attractive only to the wealthy, for the reasons that I have just given, but funded by the general taxpayer. By contrast, we are committed to promoting better outcomes for all pensioners in retirement. The Government are clear that innovation in pension provision must take place within the principle of tax-privileged pension savings being used to provide a retirement income, and the RIF violates that principle.
Finally, I turn to new clause 11. Value-protected annuities are permitted from 6 April 2006. They allow providers to offer an annuity that includes a repayment on death before 75 of an amount representing the initial capital value of an individual’s pension or annuity less any income paid before the date of death. The new clause would abolish the current age limit of 75 where value protection can be offered.
A concern commonly expressed by consumers with annuities is the risk of dying soon after purchasing the annuity, so that the annuitant might not receive a financial benefit. Such concerns tend to reveal a misunderstanding about the basic insurance properties of annuities and the role of pooling. The benefit of buying insurance is the peace of mind provided even if an event does not occur and no claim is made. If the insured event does not occur, in this case if a person lives longer than expected, there is no return of the premium—the pension fund—so an annuitant’s early death does not result in profit for the insurer; it rather contributes to paying the pensions of those who live longer than expected.
 The Government have nevertheless responded to early-death concerns by enabling providers to offer value- protected annuities in the early stages of retirement. The option expires at age 75 and abolishing that limit would tend to benefit those interested in using their pension fund more for inheritance planning than to provide a retirement income.
The hon. Member for Eastbourne prayed in aid the alternatively secured pension scheme as representing, as he put it, an appetite for change. He suggested that it supports those who try to get around annuitisation. That is not entirely accurate, and I remind the hon. Gentleman of what the then Financial Secretary, my right hon. Friend the Member for Bolton, West (Ruth Kelly), said at the time of the scheme’s introduction:
“We have made this concession because people hold significant, principled, religious objections to the pooling of mortality risk. We will keep the matter under review and check to see whether abuse is occurring. We stand ready to make any changes needed to preserve the integrity of the tax system.”—[Official Report, Standing Committee A, 8 June 2004; c. 485.]
So, far from being a chink in the defence of the scheme, it was accepted from the outset that that did not represent a rethinking of the principles underpinning annuitisation. It was a specific concession made in response to a specific pressure, and it has been our intention all along to reinforce the tax principle that underlines the annuity system and has done since 1976.

Nigel Waterson: I take the Minister’s point about intention, but can he shed any light on why the Government took no steps to put that fundamental condition for ASPs in the 2004 Act?

James Plaskitt: I think that the answer to that is contained in the discussion of the matter in the document to which the hon. Gentleman referred earlier, “The Annuities Market”. The Financial Secretary at the time gave an explicit undertaking that the workings of the system would be kept under review, as indeed they have been. Subsequent changes have been introduced, such as sanctions for breaching the minimum withdrawal and the additional measures that the hon. Gentleman mentioned to prevent misuse of the system as a tax-avoiding inheritance vehicle. We have indicated that if further changes are necessary to reinforce and protect the principle of the system, they will be included in the next Finance Bill.
I have taken time to set out our policy on turning tax-privileged savings into a retirement income to show why the proposed RIF is inconsistent with the policy that has been in place since 1976. The new clauses are essentially intended to benefit those who willingly take advantage of the tax relief given to pensions savings to build up substantial pension pots and then break their part of the deal by using that tax-privileged fund for other purposes. For that reason I urge the hon. Gentleman to withdraw the motion.

Nigel Waterson: I am grateful to the Minister for taking us in some detail through the well-trodden brief from the Treasury about why it does not accept the principle of the new clauses. The fact is that the Minister has been unable to point to a single other country in the entire world that has this system. The Treasury’s view is clear, as the Minister said—that the system is designed to provide income in retirement and has no other purpose. The new clauses deal with the legitimate concerns of taxpayers; we are, after all, considering people’s money. It is not the Chancellor’s money. Those people have of course had some tax relief but it is their money, set aside during their working lives.
The Minister said that the system has been in place since 1976, which is interesting. Compulsory annuitisation, therefore, is a relatively modern concept. However, parties change their minds and my party has changed its mind. That should be abundantly clear, not only from what I have said, but from the series of private Members’ Bills from my colleagues in the official Opposition.
I was interested in what the Minister said about the age limits and so on and pleased that he is going to keep those under review. The trouble with the debate is that everyone knows everybody else’s arguments in advance, so there is an element of formality, a ritual ballet that we go through, and the Minister said what I predicted: that the Turner commission supported the principle. However, I went on to quote other bits of the Pensions Commission report, which suggested that it was in favour of greater flexibility as well.
The Minister talked about the dangers of people trying to avoid inheritance tax. If the Chancellor would only reduce the tax or increase the threshold significantly, perhaps the problem would not be as acute as he believed. He asked what would happen to the RIF on death. I think our intention is that people should be able to pass the fund on, which is not an aspiration that we should look down on—I have made that point. Fundamentally, when my hon. Friend the Member for Weston-super-Mare asked the Minister whether, if the technical difficulties could be overcome, he would accept the principle, he firmly and clearly said no—that it was not a question of technical details but of the principle.
As I said, no other country does this. The Minister has certainly not been able to point to one. We will return to the issue, but for the moment I beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn.

New Clause 12

Report on phasing in the 30 year contribution condition
‘The Secretary of State must, not later than 1st July 2007, lay before Parliament a report on the costs and feasibility of phasing in the condition introduced by paragraph 5A(2)(a) of Schedule 3 to the SSCBA (inserted by section 1(3) of this Act).’.—[Andrew Selous.]

Brought up, and read the First time.

Motion made, and Question put, That the clause be read a Second time:—

The Committee divided: Ayes 4, Noes 10.

Question accordingly negatived.

New Clause 15

Report on contribution credits
‘The Secretary of State shall present a report annually to the House of Commons on—
(a) the number of carers in receipt of contribution credits;
(b) the number of carers caring for 20 or more hours per week who are not in receipt of contribution credits;
(c) the associated costs of contribution credits to the National Insurance Fund of (a);
(d) an estimate of the cost of providing contribution credits to persons falling within paragraph (b), and
(e) any proposals he may have for reviewing eligibility for contributions credits.’.—[Andrew Selous.]

Brought up, and read the First time.

Motion made, and Question put, That the clause be read a Second time:—

The Committee divided: Ayes 5, Noes 10.

Question accordingly negatived.

New Clause 21

Report on older workers not paying or being credited with National Insurance contributions
‘The Secretary of State shall present a report annually to the House of Commons—
(a) analysing, by local authority area and by job sector, the number and distribution of people over 60 seeking work and not being credited with contribution credits, and
(b) on the training opportunities for people seeking to increase the number of their qualifying years for receipt of a full Basic State Pension.’.—[Andrew Selous.]

Brought up, and read the First time.

Motion made, and Question put, That the clause be read a Second time:—

The Committee divided: Ayes 5, Noes 10.

Question accordingly negatived.

New Clause 22

Commission on public sector pensions
‘The Secretary of State shall establish an independent commission to evaluate the future terms, benefits and financing of public sector pensions.’.—[Mr. Laws.]

Brought up, and read the First time.

David Laws: I beg to move, That the clause be read a Second time. We are now into the last five new clauses—four of them, I am pleased to say, Liberal Democrat and one, no doubt, an expensive probing amendment from the hon. Member for Northampton North. That will allow me to triangulate my prudent and reasonable position wonderfully in the middle of these various contesting parties.
New clause 22 is an extremely important one, and the Minister will be delighted to see that I have tabled one that will help him to save money and, maybe, answer some of the problems that the Government have about funding a decently founded basic state pension. Hon. Members will immediately recognise and, I think, be instinctively sympathetic to the wording of new clause 22. The wording is lifted from the report of the Work and Pensions Committee, which concluded, in paragraph 418:
“We agree with the point made”—
by the right hon. Member for Birkenhead (Mr. Field)—
“that informed discussion, rather than ‘merely shuffling our prejudices’ is necessary for a debate on the future level and terms of public sector pensions. We recommend that the Government commission an independent review, which includes involvement from both the private and public sectors, about the future terms, benefits and financing of these schemes.”
You will note, Mr. Taylor, that our new clause also calls on the Government to establish an independent commission,
“to evaluate the future terms, benefits and financingof public sector pensions.”
So, I am hoping for considerable support from both sides of the House on this reasonable and prudent disposal, which was supported by Labour, Conservative and Liberal Democrat members of the Select Committee. This is not one of the dogs that barked very much during the Pensions Commission report. Lord Turner had, after all, started off with a fairly narrow remit, but had understood that the remit could only make sense if he broadened it somewhat to include a lot of the state pension architecture. It would, perhaps, have been a bridge too far if he had debated the issue of public sector pensions as well.
 Nevertheless, it was quite clear in the Pensions Commission report—I think it was in its first rather than its second report—that it was flagging up the growing inequality of provision between the public and private sectors, and the need for public policy to address that issue. In some of the evidence that outside groups gave the Select Committee, there was concern about the growing cost of public expenditure on public sector pensions. Adrian Waddingham, from the Association of Consulting Actuaries, told the Committee:
“I think there will be political resentment in future if we do have the ‘them’ in the public sector and the ‘us’ in the private sector with this huge disparity”.
When Lord Turner himself gave evidence to the Select Committee in December 2005, he took the view that it was perfectly reasonable to have salary-related pensions in the public sector as long as there was a process of “continual adjustment” so that as life expectancy goes up the generosity and cost of public sector pensions is kept reasonably stable.
I think that the Select Committee was particularly influenced by the right hon. Member for Birkenhead, who made a sensible contribution. He pointed out that a lot of the debate about public sector pensions is not informed by statistics and tends to involve a shuffling of people’s prejudices rather than a thoughtful and considered debate. That is why he and the Select Committee argued, as we are doing today, that there is an extremely strong case for establishing precisely the kind of independent commission that the Government established to look at the rest of the pension system in order to investigate that issue and ensure that public policy is informed by facts, not spin or prejudice from either end of the spectrum.
Why is that so important? In a few years’ time, public sector pensions will account for about £2 or £3 in every £100 of public expenditure. Public sector pensions represent an extremely rapidly growing area of public expenditure. At the moment, they account for about 1.5 per cent. of gross domestic product, and even after the relatively modest savings in the existing reforms that the Government are banking, the cost of those pensions will rise by about 50 per cent. as a share of GDP by 2020 to 2030, to about 2.1 or 2.2 per cent.
I suspect that when we get new figures on the cost of public sector pensions, relating to the unfunded liability and their share of GDP in the future, we will find that the rising cost profile will continue more rapidly, and that it will be powered not only by the terms of public sector pension agreements, but by the increasing numbers of public sector workers since 1999, and increasing pay costs, which recently have been a matter for public debate and comment in the NHS and elsewhere. Those things are bound to fuel the cost of public sector pensions.
It is ironic that the Government are constantly telling us that they have no money to repair the state pension architecture. Their figures show that between 2010 and 2020 the share of GDP spent on the state pension architecture will fall by 0.1 per cent. at precisely the time when the cost of public sector pensions will continue to increase rapidly. That looks odd and we wonder why the Government’s priority is not to first restore a decent state pension architecture for every member of the public and then to fund a decent public sector pension on top of that.

James Purnell: As the hon. Gentleman knows, the proportion of GDP spent on state pension does grow. The flat period is owing to the state pension equalisation between men and women. In future, I hope that he will make that clear when he mentions that statistic.

David Laws: I think that what the Minister means is that I am right to suggest that the share of GDP spent on the state pension architecture is going to fall and that that fall can be decomposed into some areas of increasing expenditure offset by savings made from increasing the state pension age for women between 2010 and 2020.
I do not know why the Minister is so grumpy about this. His own regulatory impact assessment, which comes with the Bill, is plain as punch clear that there will be a decline from 6.2 to 6.1 per cent. over the next few years.

James Purnell: The hon. Gentleman knows very well that that figure grows over the period covered by the RIA. He has picked one date in order to create a misleading impression. The only reason why that is happening is state pension age equalisation.

David Laws: The evidence will show that I am not picking one year. I am looking at what the cost is today and at what the cost will be not just in one year but in each year from 2010 to 2019. For all of those years, the share of GDP spent on public pension benefits in the state pension architecture will be less than it is today. That looks very odd with the rising costs to public sector pensions. There is an important cost issue and perhaps we could make some savings here and put them back into the state pension architecture to deal with all the problems that we have discussed during our proceedings.
Then there is the issue of the future stability of these schemes. Frankly, in changing the state pension age, the Government have demonstrated the right way to manage some of these big public expenditure issues. They have taken the decision now and they are making these changes for 20 or so years’ time so that people have a proper chance to plan. What people object to are sudden changes to their pension benefits or arrangements over a very short period so that they have no ability to plan and make adjustments.
The risk of the Government’s closing their eyes to some of the issues and the growing cost of public sector pensions is that at some stage when public expenditure pressures are bearing down on them or on a future Government, as they assuredly will, there will be huge pressure to make changes to public sector pensions swiftly and in a rather chaotic way. Perhaps there will be a risk not only that people will feel aggrieved but that we will throw the baby out with the bathwater and end up getting rid of what in many respects are schemes based on principles that we might want to retain in future. The stability of these schemes depends on making sensible reforms in a timely fashion and not leaving things to the last minute when there is some kind of fiscal crisis to which the Government must respond.
The third issue which relates to the importance of public sector reform is mobility between the public and private sectors. It is increasingly difficult to persuade people, particularly later on in their careers when they have final salary schemes, to shift from the public sector to less highly paid, less stressful jobs in the public sector with a lower final salary or to switch between sectors. The Confederation of British Industry and other business organisations are extremely concerned about the potential disparity between the public and private sectors.
In the past there was a strong argument that some parts of the public sector appeared to have quite low pay rates compared to the private sector so there was a trade-off between pay and pension benefits; the public sector got a better pension deal but a worse pay deal. The figures that have been produced not only by the CBI but by groups such as the Pensions Policy Institute appear to indicate that that is no longer true; there is no longer a pay disparity between the public and private sectors. That obviously depends on how one defines the comparisons. It certainly gives us cause to reflect on the traditional argument that has been used to defend high public sector pension benefits.
I have given three reasons why this issue is so important. What sorts of reform could we expect to see in future and what should those reforms be based on? I very much hope that in reforming public sector pensions we will not simply enter into some sort of race to the bottom. I am not inviting the Government, and I would not invite any independent commission, simply to draw a line between where we are on public sector pensions now and the lowest or average levels of pension provision in the private sector. We would want to ensure that public sector workers have good pensions to retire on. We respect the fact that there are many public sector workers who have quite low pay throughout their careers and who retire on amounts of money that would not appear to be generous in many people’s terms.
The issue with public sector pension reform is therefore not simply to have a race to the bottom but to ensure fairness between the private and public sectors and to ensure that if there are good public sector pension schemes, public sector workers pay for them. We must not rely on the general taxpayer to fill a growing hole in the years ahead, at a time when the taxpayer who does not work in the public sector also has to make greater contributions to his or her own private pension or accept severe cuts in the level of those pensions.
It is disappointing that the Government have been so timid in this area, given that the Prime Minister is always talking about tough choices and suggesting that radical reform is on the agenda. He must be aware of the growing cost and of the Pension Commission’s figures, which show that 85 per cent. of public sector employees are in an occupational pension scheme, compared with 30 per cent. of private sector workers. A big gap is emerging.
 I notice that Ministers are not so uncompromising when they have to account for their position in less friendly environments than those to which they are accustomed, such as Labour party conferences or meetings with the unions before the 2005 general election. In other places, such as at the Financial Times business pensions summit, which took place in November last year, what they say is not quite as intransigent as what they say to their hon. Friends on the Back Benches and in private to the union leaders, whose support and finance they are keen to get prior to a general election.
In Pensions Week of 27 November 2006, Daniel McAllister quoted the answer given by the Secretary of State at the Financial Times business pensions summit when he was asked about the cost of public sector pensions and the growing inequality between the public and private sectors. The Secretary of State said:
“It would be a bad place to end up where only people in the public sector had DB pensions. If that happened we would have to go back and review the deals made. The general public would not want to contribute in taxes to a special pension for civil servants that they don’t have access to.”

Nigel Waterson: I wonder whether the hon. Gentleman is aware that at a recent ABI gathering—he may have been there—the self-same Secretary of State made a similar comment. He said that the Government would have to revisit the deal with the public sector unions that was reached by his Cabinet colleague.

David Laws: That is interesting, and it adds even more fuel to the fire. It appears that Ministers have been caught saying one thing in one place and something slightly different in another. One suspects that the instinctive modernising tendencies of the Secretary of State are coming face to face with the grim financial realities of the Labour party and the concern of the Chancellor of the Exchequer to ensure that he has support in all the right places.

Sally Keeble: The hon. Gentleman just referred to civil servants, but when he talks about public sector pensions is he talking about all the local government employees and fire service employees as well? There is a plethora of schemes that are subject to different pressures.

David Laws: The hon. Lady makes an excellent point, as ever. I agree that there is a wide variety of different schemes, which I will discuss in a moment. We should distinguish between the different schemes involved, because the level of generosity is often quite different. We should not assume that all public sector schemes are unaffordable just because some of them are.

Sally Keeble: I was thinking in particular about different occupational pressures. The firefighters’ pension, for example, is surrounded by particular pressures. It has been subject to the most severe criticism, but it is known that firefighters have particular problems because of the high injury and early retirement rates.

David Laws: The hon. Lady raises an excellent point, although I think that in the past there were quite a few abuses of early retirement in many public sector schemes. If she looks at the figures for the past few years, she will see that the percentage of early retirement pensions has been falling rapidly, which indicates that something rather odd was happening before.
The hon. Lady raises an excellent point in relation to the differences between different schemes, which is another argument for having an independent commission.

It being twenty-five minutes past Ten o’ clock, The Chairman adjourned the Committee without Question put, pursuant to the Standing Order.

Adjourned till this day at half-past One o’clock.